8-21 SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in fie stocks:

Stock investment Stock's Beta Coefficient

A $160 Million 0.5

B 120 million 1.2

C 80 million 1.8

D 80 million 1.0

E 60 million 1.6

Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 6%, and you believe the following probability distribution for future market returns is realistic:

Probability Market Return

0.1 -28%

0.2 0

0.4 12

0.2 30

0.1 50

a. What is the equation for the security market line (SML)? (Hint: First, determine the expected market return.)

b. Calculate Kish's required rate of return.

c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has an expected return of 15%, and its estimated beta is 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the Stock?